Alpha faces lower credit rating after closing 8 mines

Alpha Natural Resources (ANR-N) may have its credit ratings cut by Standard & Poor’s after it said it will curtail production and close eight of its U.S. coal mines to stay profitable in the low price environment.

Alpha, which is the second-largest coal miner in the U.S., announced yesterday that it will reduce annual production by 16 million tons, eliminate 1,200 jobs company-wide, starting immediately by letting go 400 employees at eight mines in Virginia, West Virginia and Pennsylvania.

Of the eight, four will be closed in West Virginia, three in Virginia and one in Pennsylvania. The company says the rest of the layoffs will be made throughout the year until early 2013.

The job losses will affect 9% of its current staff of 13,000. The company says it will try to re-employ some of its dismissed workers for other positions within the organization.  

In a statement today, S&P placed the Bristol, Va.-based firm’s ratings, including its BB- corporate credit rating, on “credit watch with negative implications,” meaning it will review the ratings and potentially lower them.  

“Alpha now plans 2013 tonnage production around the low-80 million range, down from our previous expectation of 90 million tons,” S&P notes in a statement.

It explains it previously expected Alpha’s 2013 EBITDA or earnings before interest, taxes, depreciation and amortization to fall between US$750 million and US$850 million, but owing to the lower expected volumes and prices it now forecasts EBITDA will be “materially lower.”

Alpha comments that about 40% of the production cuts will come from its high-cost mines in the Eastern U.S. “that are unlikely to be competitive” in the near-term, while half of the reductions will take place in the Powder River Basin, located in northeastern Wyoming.

With the trimming of its production profile, the miner expects to save US$150 million in overhead costs, which include the US$50 million to US$60 million of cost reductions estimated in early June, after it halted coal four mines in Kentucky, pared production, and slashed 150 jobs.

The firm has a lot of exposure to the high-cost Central Appalachia region and faces several challenges “including operating problems, price volatility, and increasing costs and regulator scrutiny,” S&P cautions in the note. It expects to complete its review of the stock’s credit ratings within a few weeks.

Alpha closed the day in New York down 3% at US$7.63 per share.